Wednesday, October 30, 2013

America's job market is sluggish.
Of that, there is no doubt and this issue is one of the things that keeps
central bankers awake at night, particularly those who have set an unemployment target of 6.5 percent. Unfortunately, many of us get distracted with the monthly headline U-3 unemployment statistic which, as you will see, is hardly an accurate reflection of the true employment situation in the United States.

Here are some of the things that are
worrisome:

1.) The average duration of unemployment is not
far below its post-recession peak of 40.4 percent and currently sits at 36.9 weeks,
more than double the normal inter-recessional rate since the mid-1970s as shown
here:

Here is a closeup showing what has
happened to the duration of unemployment since the Great Recession officially ended in June 2009:

When the recession ended, the
average duration of unemployment was 23.9 weeks. This rose to 40.4 weeks
in July and September 2011 and fell back to its post-Great Recession low of
35.3 weeks in January 2013. Since then, it has risen back to its current
36.9 week level. The trend in this lagging indicator can hardly be called
positive and its current elevated level compared to historical levels shows
that the employment situation in the U.S. is far from healthy.

2.) The number of long-term unemployed Americans is obviously at
an elevated level. Currently, 4.146 million Americans have been
unemployed for 27 weeks or more, again, well more than double the normal
inter-recessional number looking back several recessions as shown here:

The number of long-term unemployed
now stands at 36.7 percent of all unemployed (U-3). In the year before
the Great Recession, there were between 1.09 and 1.37 million long-term
unemployed. This peaked at 6.704 million in April 2010, an increase of 389
percent from the beginning of the Great Recession. Since then, the number
of long-term unemployed has only dropped 38 percent, hardly a significant dent.

The population is simply growing
faster than the growth in the number of employment opportunities available.
We have to go all the way back to 1983 to see a ratio lower than what we
have today and that low occurred after the crushing twin recessions of the
early 1980s.

We keep hearing about this which has been the one saving grace
of the monthly unemployment numbers:

The Labor Force Participation Rate
is defined as the percentage of working-age persons in the economy who are
employed or who want to be employed (i.e. are searching for work). As you
can see on the graph, the decline in the labor force participation rate is
unprecedented except for a very short stretch in the early 1960s. As people withdraw from the labor force, it pushes the unemployment rate down. The
causes of the decline in labor force participation are generally believed to be related to the changing
demographic in the United States; as the population ages (thanks to the hordes
of baby boomers that live among us), older workers retire and remove themselves from the
pool of those that are employed or want to be employed. Here is a graph
from the American Institute of Economic Research that refutes that notion:

The labour force participation rate
for older adults between the ages of 55 and 64 has actually steadily risen
since the late 1980s, from just under 55 percent to around 65 percent today.
In contrast, the labour force participation rate for younger adults
between the ages of 20 and 24 has dropped steadily from an annual average of
around 80 percent in the late-1980s and early 1990s to its current average
level of around 72 percent. Interestingly, baby boomers made up about
11.9 percent of the labour force in 1990 and 19.5 percent of the total labour
force in 2010 with projections showing that this will reach 25.2 percent in
2020. That's probably not going to help employment statistics down the road.

When you put all of this data into
the context of the Herculean monetary efforts made by the Federal Reserve since
QE1 began in November 2008, it is sobering. The fact that the employment side of the
economy (save the headline unemployment rate which is still elevated compared to past inter-recessional periods) has performed so poorly since the end of the Great Recession makes it
apparent that it is unlikely that further intervention by the Fed will make one
bit of difference to the over 11 million Americans that find themselves part of
the U-3 statistic and the additional 6.2 million Americans who find themselves part of the U-6 statistic. While Mr. Bernanke's much-dreamed of 6.5 percent headline unemployment rate may be reached sometime in 2014, the fact is that his Grand Experiment has had relatively little impact on employment compared to past recoveries.

2 comments:

You cannot underestimate the damage of long-term unemployment and weak job creation. The burden of caring for those not working will be transferred to society. If to many people shift into this category we will slowly wear down through attrition. Finding a fair way to share and balance the work load that goes on every day may be one of the most important problems facing our modern world. Not discovering a solution to this dilemma bodes poorly for our consumer driven economy. More on this topic below,

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.